Two-tier trend seen in mortgage delinquency pattern

TransUnion unveiled research this week indicating that the national mortgage delinquency rate actually consists of two streams of data, that, when separated, tell a different story than the narrative seen when only the total trend has been examined.

"Stubbornly high mortgage delinquency rates may actually be as low as those observed 10 years ago when taking into account mortgages that have remained in the system for 180 days or more," TransUnion stated.

Borrowers are rated delinquent on mortgages if they are 60 days or more past due. While overall rates remain historically high--4.56%, more than double the pre-crisis normal level of delinquencies--two trends are going on now.

Earlier this month TransUnion noted that delinquency rates had seen their largest drop in 20 years. In the first quarter, the delinquency rate improved by 21% when compared to the first quarter of 2012, and by 12% compared to the last quarter of 2012.

Looking deep into the data, TransUnion found the underlying trend noted earlier: Mortgages originated before 2009 make up 50% of all outstanding mortgages but 86% of all mortgage delinquencies.

This is a "rat in the python" episode. Many factors, including attempts at workouts, legislative and other delays, have kept many troubled mortgages in the system and out of foreclosed status longer than usual. This "hangover" of troubled loans produces the numbers mentioned above.

TransUnion's contention is that lenders should feel greater confidence in making new mortgage loans.

Here's the reasoning, from Tim Martin, group vice-president of U.S. Housing in the company's financial services business unit.

Twenty percent of mortgages originated in 2007 have at one time or another been delinquent and 14.5% delinquent within the first three years of the loan.

By contrast, only 2.5% of the mortgages in the 2010 vintage have experienced a delinquency in--the first three years of their life.

"Some people may see the high overall mortgage delinquency number and worry that mortgage borrowers are still a bad credit risk," said Martin, "but we don't believe that's the right conclusion."

Martin points to the younger loans' strong performance. "Even the older vintages, at one time deteriorating quickly, are now contributing new delinquent borrowers at rates nearly identical to the good-performing newer mortgages," said Martin.

Explaining further, Martin said that "it's no longer a credit quality or home price depreciation issue, and we are not adding many new delinquent mortgage borrowers into the pool these days. Instead, it's an issue of the timelines to cure or foreclose. We are simply not draining the pool very fast, and the size of the ‘drain' varies significantly by state."

In an interview about the findings, Martin said that while TransUnion sees cause for more optimism by lenders, the industry still has issues to finish working through.